H&M to shutter 160 stores amid profit slump

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Dive Brief:

H&M on Thursday said that fourth quarter net sales rose 12% (or 6% in local currency) to SEK 56.4 billion ($50.4 billion). Online sales rose 24% in SEK and 20% in local currency.

Gross profit in the quarter reached SEK 30.6 billion, with a gross margin of 54.2%, as the cost of markdowns declined by 0.6 percentage points, according to a company press release. Quarterly profit after financial items fell 11% to SEK 4.35 billion, as the development of new warehousing for online fulfillment took a SEK 560 million toll, the company said.

For the full year, net sales rose 5% to SEK 210.4 billion, with sales and market share rising in most markets during the second half, the company also said. Online sales rose 22% to about SEK 30 billion, reaching 14.5% of total sales. Gross profit for 2018 was SEK 110.9 billion as gross margin reached 52.7%. Profit after financial items was SEK 15.6 billion and profit after tax was SEK 12.65 billion.

Dive Insight:

The company is climbing a learning curve. CEO Karl-Johan Persson cited "difficulties with the logistics upgrade" in some markets earlier in 2018, which led to costs that showed up in the fourth quarter. "Applying the lessons learned, we have now increased investments to secure upcoming transitions," he said in a statement.

Its failure to produce clothing that was in demand, a must for any fast fashion retailer, much less a leader in the space, was evident last year at the company's flagship as it battled a massive inventory pileup. The company appears to be digging out from that, with signs of recovery coming in the second half of 2018.

"It has been a challenging year for H&M group and the industry but after a difficult first half, there are signs the company's transformation efforts are beginning to take effect," Persson said. "Improved collections generated better full-price sales and lower markdowns towards the end of the year. This gave us confidence to accelerate our transformation plans in the fourth quarter with a particular focus on the upgrade of our logistics systems. Inevitably resulting in increased costs but will lead to a range of improvements for customers."

The company's move to boost its online sales and integrate them better with its many stores was mixed globally. The U.K., for example, delivered 38% online growth, and a 1% decline in stores, while growth in China (up 24%), India (up 43%) and Russia (up 27%), was based on increases in both channels, according to Persson. "However, other markets such as the USA and Norway, were more challenging," he said. "In parallel with our global online roll-out, we are intensifying our store portfolio optimisation and we continue the integration of physical stores and digital channels."

That will mean some 160 store closures this year, with an "option to renegotiate almost 1,000 store contracts," the company said in its full-year report presentation. The company plans net 175 new stores in 2019, with about 335 new stores opening, (of which 240 will be H&M stores), with a focus on growth markets, the company said. That shows that the company plans to grow its new non-flagship banners, except for Cheap Monday, which it shuttered last year.